Argentina has failed to unfreeze a loan of nearly $1.3bn which the International Money Fund blocked last week amid growing concerns over the country's financial health.

Based on the findings of the mission that has been to Buenos Aires, Fund Management is unable at this stage to recommend completion of the review of the IMF-supported programme

IMF spokesman

Argentina's Economy Minister Domingo Cavallo, who travelled to Washington to discuss the matter, is thought to have agreed with the IMF new targets for budget cuts and economic reform to get the loan programme back on track.

The loan, part of a $40bn dollar rescue package agreed by the IMF last December, was frozen on Wednesday due to Argentina's repeated failure to meet deficit targets.

But further cuts, seen as necessary to gain Argentina financial credibility, will be highly unpopular in a country hit by recession and social unrest.

Mr Cavallo nonetheless described his talks with IMF officials as "positive".

"I am leaving because we have to work with the president, the cabinet and the provincial governors so that we are sure we are able to what's necessary so that Argentina inspires credibility," Mr Cavallo said.

Mr Cavallo said Argentina was faced with unspecified "decisions" regarding next year's budget to "show that there is political backing and support for the budget of the year 2002".

Need for cash

Argentina wanted the IMF to unblock the loan because it desperately needs extra money to avoid defaulting on its foreign debts of $132bn.

Shops and consumers are suffering alike

The blocking of the loan by the IMF dealt a huge blow to confidence in Argentina.

The IMF said it could not hand over the money as it had been unable to complete the necessary financial review.

Some analysts said the IMF was unlikely to be persuaded to change its mind.

"The big problem the fund has with Argentina is the same that investors and Argentines themselves have - we don't have faith in the ability of the government. So the fund should not believe promises the government makes will be fulfilled," said Aldo Abram, an economist with consultants Exante.

Currency fears

The country needs to make $900m in debt payments this month.

Cavallo's reputation is on the line

Mr Cavallo hoped to persuade the IMF to unblock the loan to free up other sources of funding too.

On Thursday, the World Bank and the Inter American Development Bank said they had frozen about $1.1bn in loans to Argentina until the outcome of the IMF talks was known.

Mr Cavallo said the IMF talks did not cover Argentina's currency regime.

The Argentine peso has been pegged to the US dollar for the past decade, and Mr Cavallo has repeatedly insisted that fears the government is planning to devalue the currency are unfounded.

The Argentine Government has been forced to introduce drastic measures to stave off default.

On Thursday, it said it planned to use money held in private pension funds to help pay its bills.

And last weekend the government banned Argentines from withdrawing more than $250 per week from their private bank accounts to prevent economic fears triggering a run on the banks.

Correspondents say that most large banks extended their opening hours on Saturday to enable staff to deal with the growing numbers of customers worried about the fate of their savings.